Doane Pet Care 10-Q 2006 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 2, 2005

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from       to     

Commission file number 0-27818

Doane Pet Care Company

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction
of incorporation) 43-1350515
(IRS Employer
Identification No.)

210 Westwood Place South, Suite 400
Brentwood, TN 37027

(Address of principal executive office, including zip code)

(615) 373-7774

(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes þ  No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act).Yes o  No þ

     As of August 22, 2005, the registrant had outstanding 1,000 shares of common stock, all of which were held by its parent, Doane Pet Care Enterprises, Inc.

TABLE OF CONTENTS

	Page
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of the end of the second quarter of fiscal 2005 and the end of fiscal 2004		1
Unaudited Condensed Consolidated Statements of Operations for the second quarter and first six months of fiscal 2005 and 2004		2
Unaudited Condensed Consolidated Statement of Stockholder’s (Deficit) Equity and Comprehensive Loss as of the end of and for the first six months of fiscal 2005		3
Unaudited Condensed Consolidated Statements of Cash Flows for the first six months of fiscal 2005 and 2004		4
Notes to Unaudited Condensed Consolidated Financial Statements		5
Report of Independent Registered Public Accounting Firm		17
Item 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations		18
Item 3. Quantitative and Qualitative Disclosures about Market Risk		25
Item 4. Controls and Procedures		26

Item 1. Legal Proceedings	28
Item 6. Exhibits	28
Signatures	29
Letter from KPMG LLP
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

PART I. Financial Information

ITEM 1. Financial Statements

DOANE PET CARE COMPANY AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value amounts)

	End of
	Second quarter			Fiscal
	2005			2004
ASSETS
Current assets:
Cash and cash equivalents	$	37,031		$	28,847
Accounts receivable, net		91,491			112,445
Inventories, net		67,657			68,321
Deferred tax assets		1,935			2,414
Prepaid expenses and other current assets		11,080			7,038
Total current assets		209,194			219,065
Property, plant and equipment, net		236,837			258,070
Goodwill and other intangible assets		376,373			390,471
Other assets		29,388			34,300
Total assets	$	851,792		$	901,906
LIABILITIES AND STOCKHOLDER’S (DEFICIT) EQUITY
Current liabilities:
Current maturities of long-term debt	$	3,516		$	3,673
Accounts payable		84,058			102,149
Accrued liabilities		50,698			59,239
Total current liabilities		138,272			165,061
Long-term debt:
Long-term debt, excluding current maturities		577,260			580,090
Senior Preferred Stock (Redeemable), 3,000,000 shares authorized, 1,200,000 shares issued and outstanding, $118,987 current redemption value		114,874			106,421
Total long-term debt		692,134			686,511
Deferred tax liabilities		34,868			33,641
Other long-term liabilities		9,842			9,567
Total liabilities		875,116			894,780
Commitments and contingencies
Stockholder’s (deficit) equity:
Common stock, $0.01 par value; 1,000 shares authorized, issued and outstanding		—			—
Additional paid-in-capital		115,674			115,674
Accumulated other comprehensive income		32,571			62,650
Accumulated deficit		(171,569	)		(171,198	)
Total stockholder’s (deficit) equity		(23,324	)		7,126
Total liabilities and stockholder’s (deficit) equity	$	851,792		$	901,906

See accompanying notes to the unaudited condensed consolidated financial statements and
accompanying report of independent registered public accounting firm.

1

DOANE PET CARE COMPANY AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)

	Second quarter						First six months
	2005			2004			2005			2004
Net sales	$	243,872		$	258,338		$	511,008		$	529,218
Cost of goods sold		201,151			225,201			416,184			455,263
Gross profit		42,721			33,137			94,824			73,955
Operating expenses:
Promotion and distribution		14,729			13,767			29,159			27,994
Selling, general and administrative		12,811			12,803			25,930			25,986
Amortization		1,024			1,134			2,190			2,363
Other operating expense (income), net		1,805			3,938			(1,711	)		5,161
Income from operations		12,352			1,495			39,256			12,451
Interest expense, net		19,031			18,186			37,677			36,163
Other income, net		(448	)		(331	)		(693	)		(738	)
(Loss) income before income taxes		(6,231	)		(16,360	)		2,272			(22,974	)
Income tax expense		1,316			1,377			2,643			2,570
Net loss	$	(7,547	)	$	(17,737	)	$	(371	)	$	(25,544	)

See accompanying notes to the unaudited condensed consolidated financial statements and accompanying
report of independent registered public accounting firm.

2

DOANE PET CARE COMPANY AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF
STOCKHOLDER’S (DEFICIT) EQUITY AND COMPREHENSIVE LOSS
(In thousands, except share amounts)

							Accumulated
					Additional		other
	Common stock				paid-in		comprehensive			Accumulated
	Shares		Amount		capital		income (loss)			deficit			Total
Balances at end of fiscal 2004		1,000	$	—	$	115,674	$	62,650		$	(171,198	)	$	7,126
Comprehensive loss:
Net loss		—		—		—		—			(371	)		(371	)
Foreign currency translation		—		—		—		(30,079	)		—			(30,079	)
Total comprehensive loss														(30,450	)
Balances at end of second quarter 2005		1,000	$	—	$	115,674	$	32,571		$	(171,569	)	$	(23,324	)

See accompanying notes to the unaudited condensed consolidated financial statements and accompanying
report of independent registered public accounting firm.

3

DOANE PET CARE COMPANY AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

	First six months
	2005			2004
Cash flows from operating activities:
Net loss	$	(371	)	$	(25,544	)
Items not requiring (providing) cash:
Depreciation		17,825			17,303
Amortization		2,258			2,860
Deferred income tax expense		2,042			2,065
Non-cash interest expense		11,099			9,713
Equity in joint ventures		(151	)		(457	)
Asset impairments		1,129			420
Changes in current assets and liabilities		(12,557	)		(12,674	)
Net cash provided by (used in) operating activities		21,274			(6,314	)
Cash flows from investing activities:
Capital expenditures		(10,132	)		(5,126	)
Other, net		(743	)		(404	)
Net cash used in investing activities		(10,875	)		(5,530	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt		—			13,078
Principal payments on long-term debt		(1,768	)		(17,276	)
Payments for debt issuance costs		(22	)		(3,002	)
Net cash used in financing activities		(1,790	)		(7,200	)
Effect of exchange rate changes on cash and cash equivalents		(425	)		(187	)
Increase (decrease) in cash and cash equivalents		8,184			(19,231	)
Cash and cash equivalents, beginning of period		28,847			29,293
Cash and cash equivalents, end of period	$	37,031		$	10,062

See accompanying notes to the unaudited condensed consolidated financial statements and accompanying
report of independent registered public accounting firm.

4

DOANE PET CARE COMPANY AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements of Doane Pet Care Company and its consolidated subsidiaries, or the Company, do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. The year-end condensed consolidated balance sheet data was derived from audited financial statements. In the opinion of management, all material adjustments, consisting of normal and recurring adjustments, have been made which were considered necessary to present fairly the financial position and the results of operations and cash flows at the dates and for the periods presented. Certain reclassifications have been made to previously reported consolidated financial statements and notes to conform with the current presentation.

     The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes contained in the Company’s 2004 annual report on Form 10-K for the fiscal year ended January 1, 2005, or the 2004 10-K, including related exhibits. The accounting policies used in preparing these financial statements are the same as those summarized in the 2004 10-K.

     In conformity with U.S. generally accepted accounting principles, preparation of the Company’s consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements; therefore, actual results could ultimately differ from those estimates.

     The Company’s fiscal year ends on the Saturday nearest to the end of December. Each quarter ends on the Saturday nearest to the end of the calendar month with the second quarters of fiscal 2005 and 2004 ending on July 2, 2005 and July 3, 2004, respectively.

(2) Recent Accounting Pronouncements

     In December 2004, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share Based Payment, or SFAS 123 — Revised. SFAS 123 — Revised eliminates the alternative to use the intrinsic value method of accounting and requires entities to recognize the cost of services received in exchange for awards of equity instruments, or compensation cost, based on the fair value of those awards at the grant date. SFAS 123 — Revised is effective as of the beginning of the Company’s next fiscal year, or January 1, 2006, for all awards granted after the effective date and for all awards modified, repurchased or cancelled after that date. In the opinion of management, the Company meets the nonpublic entity criteria under SFAS 123 — Revised. Accordingly, upon adoption, the grant-date fair value of awards of equity share options and similar instruments is to be calculated using the historical volatility of an appropriate industry sector index rather than expected volatility of the Company’s share price. The Company will evaluate the impact on its results of operations and financial position upon the adoption of SFAS 123 — Revised.

     In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, or SFAS 154. This new standard replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements and is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. The Company does not anticipate that the adoption of SFAS 154 will have a material impact on the Company’s results of operations or financial position.

5

DOANE PET CARE COMPANY AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(3) Inventories

     A summary of inventories follows (in thousands):

	End of
	Second quarter			Fiscal
	2005			2004
Raw materials	$	16,107		$	16,041
Packaging materials		21,441			20,564
Finished goods		32,385			34,573
		69,933			71,178
Less: Allowances		(2,276	)		(2,857	)
Total	$	67,657		$	68,321

(4) Property, Plant and Equipment

     A summary of property, plant and equipment follows (in thousands):

	End of
	Second quarter			Fiscal
	2005			2004
Land	$	11,210		$	11,601
Buildings and improvements		99,331			104,778
Machinery and equipment		309,644			320,097
Construction-in-progress		9,679			6,727
		429,864			443,203
Less: Accumulated depreciation		(193,027	)		(185,133	)
Total	$	236,837		$	258,070

(5) Long-Term Debt and Liquidity

     A summary of long-term debt follows (in thousands):

	End of
	Second quarter			Fiscal
	2005			2004
Revolving credit facility	$	—		$	—
Term loan facility		193,538			194,513
Senior notes		211,323			211,144
Senior subordinated notes		149,326			149,147
Industrial development revenue bonds		14,499			14,493
Debt of foreign subsidiaries		12,090			14,466
		580,776			583,763
Less: Current maturities		(3,516	)		(3,673	)
		577,260			580,090
Senior preferred stock		114,874			106,421
Total	$	692,134		$	686,511

6

DOANE PET CARE COMPANY AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     As of the end of the second quarter of fiscal 2005, the Company’s senior credit facility provided for total commitments of $230.0 million, consisting of a $195.0 million Term Loan Facility and a $35.0 million Revolving Credit Facility, with a $20.0 million sub-limit for issuance of stand-by letters of credit. The Term Loan Facility bears interest, at the option of the Company, of adjusted LIBOR plus 4.00%, or ABR, as defined in the senior credit facility agreement, plus 3.00%. The Revolving Credit Facility bears interest, at the option of the Company, of adjusted LIBOR plus 4.50%, or ABR plus 3.50%. As of the end of the second quarter of fiscal 2005, the Term Loan Facility bore interest at 7.41%.

     As of the end of the second quarter of fiscal 2005, the Company had no borrowings outstanding under its Revolving Credit Facility and $4.8 million of stand-by letters of credit outstanding, resulting in $30.2 million of availability under its Revolving Credit Facility. Availability of funds under the senior credit facility is subject to certain customary terms and conditions.

     As of the end of the second quarter of fiscal 2005, the principal amounts due under the Company’s long-term debt and the respective final maturity dates were as follows (in thousands):

		Maturities by fiscal year
												2010 and
	Final maturity	2005		2006		2007		2008		2009		thereafter		Total
Term loan facility	February 13, 20071	$	975	$	1,950	$	190,613	$	—	$	—	$	—	$	193,538
Senior notes	March 1, 2010		—		—		—		—		—		211,323		211,323
Senior subordinated notes	May 15, 2007		—		—		149,326		—		—		—		149,326
Other	Various		756		1,572		2,005		2,141		2,282		17,833		26,589
			1,731		3,522		341,944		2,141		2,282		229,156		580,776
Senior preferred stock	September 30, 2007		—		—		114,874		—		—		—		114,874
Total		$	1,731	$	3,522	$	456,818	$	2,141	$	2,282	$	229,156	$	695,650

¹ The Company’s senior credit facility matures on the earlier of November 5, 2009 or 91 days prior to the maturity of the senior subordinated notes due May 15, 2007 (as may be refinanced, extended, or renewed), unless terminated sooner upon an event of default.

     The Company is highly leveraged and has significant cash requirements for debt service relating to its senior credit facility, senior notes, senior subordinated notes, industrial development revenue bonds and foreign debt. The Company’s ability to borrow is limited by its senior credit facility, including compliance with the financial covenants therein, and the limitations on the incurrence of additional indebtedness in the indentures governing the Company’s senior notes and senior subordinated notes. The Company was in compliance with the financial covenants in its senior credit facility as of the end of the second quarter of fiscal 2005.

(6) Restructuring Activities

     In an effort to reduce manufacturing costs and increase operating efficiencies, the Company closed its Cartersville, Georgia manufacturing facility at the end of the second quarter of fiscal 2005. In connection with the plant closure, the Company recorded non-cash asset impairments of $1.1 million in other operating expense (income), net. In addition, the Company expects to incur total cash charges of approximately $0.2 million related to severance and carrying costs.

7

DOANE PET CARE COMPANY AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     A rollforward of the Company’s accrued restructuring costs for the first six months of fiscal 2005 follows (in thousands):

	First six months
	2005
Balance at end of fiscal 2004	$	722
Severance		36
Revisions to estimates		(15	)
Cash payments		(415	)
Balance at end of second quarter 2005	$	328

     During the first six months of fiscal 2005, the Company made payments of $0.4 million for severance costs related to the European restructuring plan which was completed in fiscal 2004.

     As of the end of the second quarter of fiscal 2005, the future expected payout of the Company’s accrued restructuring costs, which consist primarily of severance associated with European restructuring, follows (in thousands):

Fiscal years ending	Payout
2005	$	269
2006		59
Total	$	328

(7) Comprehensive Loss

     The components of comprehensive loss were as follows (in thousands):

	Second quarter						First six months
	2005			2004			2005			2004
Net loss	$	(7,547	)	$	(17,737	)	$	(371	)	$	(25,544	)
Foreign currency translation		(17,625	)		(873	)		(30,079	)		(4,907	)
Total	$	(25,172	)	$	(18,610	)	$	(30,450	)	$	(30,451	)

(8) Stock Option Plan of Parent

     The Company and its Parent, Doane Pet Care Enterprises, Inc., have elected to continue to follow APB 25 to account for fixed stock awards granted to employees. However, if the Company and its Parent adopted SFAS 123 to account for fixed stock awards granted to employees, the Company’s net loss for the second quarter and first six months of fiscal 2005 and 2004 would have been adjusted as follows (in thousands):

8

DOANE PET CARE COMPANY AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	Second quarter						First six months
	2005			2004			2005			2004
Net loss, as reported	$	(7,547	)	$	(17,737	)	$	(371	)	$	(25,544	)
Less: Stock-based employee compensation expense determined based on the fair value method for all awards		—			(1	)		(1	)		(2	)
Pro forma net loss	$	(7,547	)	$	(17,738	)	$	(372	)	$	(25,546	)

     At the end of the second quarter of fiscal 2005 and 2004, Parent had total options outstanding of 3,685,960 and 4,048,850, respectively, under its stock option plans. There were no new stock options granted during the first six months of fiscal 2005.

(9) Pension and Postretirement Plans

     The Company has a defined benefit, non-contributory inactive pension plan which was frozen on May 28, 1998. As a result, future benefits no longer accumulate and the Company no longer incurs service cost related to the plan. The Company’s funding policy for this inactive plan is to make the minimum annual contribution required by applicable regulations. The Company’s only active pension plan covers 42 union employees at one of its facilities. The Company also has a postretirement healthcare plan that provides medical coverage for eligible retirees and their dependents. The Company pays benefits under this plan when due and does not fund its plan obligations as they accrue; therefore, there are no plan assets. The information below has been determined based on the six months ending June 30, 2005 and 2004, respectively.

     A summary of net periodic cost follows (in thousands):

	Pension benefits
	Second quarter						First six months
	2005			2004			2005			2004
Service cost	$	9		$	9		$	18		$	18
Interest cost		254			270			507			540
Expected return on plan assets		(344	)		(347	)		(689	)		(693	)
Recognition of actuarial loss		168			169			336			338
Amortization of prior service cost		2			3			5			5
Amortization of transition obligation		1			1			2			2
Net periodic pension cost	$	90		$	105		$	179		$	210

	Postretirement benefits
	Second quarter						First six months
	2005			2004			2005			2004
Service cost	$	5		$	3		$	8		$	7
Interest cost		45			75			103			150
Recognition of actuarial loss		28			27			63			54
Amortization of prior service benefit		(61	)		(13	)		(122	)		(26	)
Net periodic postretirement cost	$	17		$	92		$	52		$	185

9

DOANE PET CARE COMPANY AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(10) Major Customer

     For both the first six months of fiscal 2005 and 2004, the same customer accounted for 44% of the Company’s net sales in the accompanying unaudited condensed consolidated statements of operations. The Company does not have a long-term contract with this customer. Trade accounts receivable with this customer were 34% and 35% of consolidated accounts receivable, net, in the accompanying unaudited condensed consolidated balance sheets as of the end of the second quarter of fiscal 2005 and the end of fiscal 2004, respectively. The loss of this customer, or a significant decrease or change in business with this customer, would have a material adverse impact on the Company’s financial position, results of operations and liquidity.

(11) Commitments and Contingencies

     The Company is a party, in the ordinary course of business, to claims and litigation. In management’s opinion, the resolution of such matters is not expected to have a material impact on the future financial condition, results of operations or cash flows of the Company.

(12) Financial Information Related to Guarantor Subsidiaries

     The Company’s guarantor subsidiaries are wholly-owned domestic subsidiaries who have jointly and severally guaranteed on a full and unconditional basis all of the Company’s senior notes and senior subordinated notes. The guarantor subsidiaries are minor subsidiaries of the Company’s domestic operations that have no material operations of their own; therefore, no separate information for these subsidiaries is presented. The financial information presented below in the guarantor columns is substantially that of the Company, excluding its European operations. The financial information presented below in the non-guarantor columns consist of the Company’s non-guarantor subsidiaries, which are its wholly-owned European subsidiaries. See Note 8, Long-Term Debt and Liquidity, in the Company’s 2004 10-K.

     Unaudited condensed consolidated financial information for the guarantor and non-guarantor subsidiaries follows (in thousands, except share and par value amounts):

10

DOANE PET CARE COMPANY AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Unaudited Condensed Consolidated Balance Sheets
For The Guarantor and Non-Guarantor Subsidiaries

	End of second quarter 2005
				Non-			Intercompany
	Guarantor			guarantor			eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	33,177		$	3,854		$	—		$	37,031
Accounts receivable, net		40,781			50,710			—			91,491
Inventories, net		40,004			27,653			—			67,657
Deferred tax assets		1,935			—			—			1,935
Prepaid expenses and other current assets		9,880			1,200			—			11,080
Total current assets		125,777			83,417			—			209,194
Property, plant and equipment, net		142,346			94,491			—			236,837
Goodwill and other intangible assets		267,780			108,593			—			376,373
Other assets		273,378			12,565			(256,555	)		29,388
Total assets	$	809,281		$	299,066		$	(256,555	)	$	851,792
LIABILITIES AND STOCKHOLDER’S (DEFICIT) EQUITY
Current liabilities:
Current maturities of long-term debt	$	1,950		$	1,566		$	—		$	3,516
Accounts payable		48,848			35,210			—			84,058
Accrued liabilities		36,950			13,748			—			50,698
Total current liabilities		87,748			50,524			—			138,272
Long-term debt:
Long-term debt, excluding current maturities		566,736			154,495			(143,971	)		577,260
Senior Preferred Stock (Redeemable), 3,000,000 shares authorized, 1,200,000 shares issued and outstanding, $118,987 current redemption value		114,874			—			—			114,874
Total long-term debt		681,610			154,495			(143,971	)		692,134
Deferred tax liabilities		32,333			2,535			—			34,868
Other long-term liabilities		9,842			—			—			9,842
Total liabilities		811,533			207,554			(143,971	)		875,116
Commitments and contingencies
Stockholder’s (deficit) equity:
Common stock, $0.01 par value; 1,000 shares authorized, issued and outstanding		—			—			—			—
Additional paid-in-capital		115,674			95,861			(95,861	)		115,674
Accumulated other comprehensive (loss) income		(24,555	)		73,849			(16,723	)		32,571
Accumulated deficit		(93,371	)		(78,198	)		—			(171,569	)
Total stockholder’s (deficit) equity		(2,252	)		91,512			(112,584	)		(23,324	)
Total liabilities and stockholder’s (deficit) equity	$	809,281		$	299,066		$	(256,555	)	$	851,792

11

DOANE PET CARE COMPANY AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Unaudited Condensed Consolidated Balance Sheets
For The Guarantor and Non-Guarantor Subsidiaries

	End of fiscal 2004
				Non-			Intercompany
	Guarantor			guarantor			eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	24,963		$	3,884		$	—		$	28,847
Accounts receivable, net		48,660			63,785			—			112,445
Inventories, net		39,406			28,915			—			68,321
Deferred tax assets		2,414			—			—			2,414
Prepaid expenses and other current assets		6,128			910			—			7,038
Total current assets		121,571			97,494			—			219,065
Property, plant and equipment, net		147,293			110,777			—			258,070
Goodwill and other intangible assets		267,780			122,691			—			390,471
Other assets		267,224			14,436			(247,360	)		34,300
Total assets	$	803,868		$	345,398		$	(247,360	)	$	901,906
LIABILITIES AND STOCKHOLDER’S (DEFICIT) EQUITY
Current liabilities:
Current maturities of long-term debt	$	1,950		$	1,723		$	—		$	3,673
Accounts payable		52,131			50,018			—			102,149
Accrued liabilities		46,623			12,616			—			59,239
Total current liabilities		100,704			64,357			—			165,061
Long-term debt, excluding current maturities		567,347			165,574			(152,831	)		580,090
Senior Preferred Stock (Redeemable), 3,000,000 shares authorized, 1,200,000 shares issued and outstanding, $110,942 current redemption value		106,421			—			—			106,421
Total long-term debt		673,768			165,574			(152,831	)		686,511
Deferred tax liabilities		30,714			2,927			—			33,641
Other long-term liabilities		9,567			—			—			9,567
Total liabilities		814,753			232,858			(152,831	)		894,780
Commitments and contingencies
Stockholder’s (deficit) equity:
Common stock, $0.01 par value; 1,000 shares authorized, issued and outstanding		—			—			—			—
Additional paid-in-capital		115,674			95,861			(95,861	)		115,674
Accumulated other comprehensive (loss) income		(24,555	)		85,873			1,332			62,650
Accumulated deficit		(102,004	)		(69,194	)		—			(171,198	)
Total stockholder’s (deficit) equity		(10,885	)		112,540			(94,529	)		7,126
Total liabilities and stockholder’s (deficit) equity	$	803,868		$	345,398		$	(247,360	)	$	901,906

12

DOANE PET CARE COMPANY AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Unaudited Condensed Consolidated Statements of Operations
For The Guarantor and Non-Guarantor Subsidiaries

	Second quarter 2005
				Non-
	Guarantor			guarantor			Consolidated
Net sales	$	172,506		$	71,366		$	243,872
Cost of goods sold		144,383			56,768			201,151
Gross profit		28,123			14,598			42,721
Operating expenses:
Promotion and distribution		6,177			8,552			14,729
Selling, general and administrative		8,723			4,088			12,811
Amortization		816			208			1,024
Other operating expense (income), net		1,816			(11	)		1,805
Income from operations		10,591			1,761			12,352
Interest expense, net		12,617			6,414			19,031
Other (income) expense, net		(791	)		343			(448	)
Loss before income taxes		(1,235	)		(4,996	)		(6,231	)
Income tax expense		1,049			267			1,316
Net loss	$	(2,284	)	$	(5,263	)	$	(7,547	)

	Second quarter 2004
				Non-
	Guarantor			guarantor			Consolidated
Net sales	$	192,502		$	65,836		$	258,338
Cost of goods sold		173,380			51,821			225,201
Gross profit		19,122			14,015			33,137
Operating expenses:
Promotion and distribution		6,580			7,187			13,767
Selling, general and administrative		8,673			4,130			12,803
Amortization		935			199			1,134
Other operating expenses		—			3,938			3,938
Income from operations		2,934			(1,439	)		1,495
Interest expense, net		12,205			5,981			18,186
Other (income) expense, net		(521	)		190			(331	)
Loss before income taxes		(8,750	)		(7,610	)		(16,360	)
Income tax expense		1,070			307			1,377
Net loss	$	(9,820	)	$	(7,917	)	$	(17,737	)

13

DOANE PET CARE COMPANY AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Unaudited Condensed Consolidated Statements of Operations
For The Guarantor and Non-Guarantor Subsidiaries

	First six months 2005
				Non-
	Guarantor			guarantor			Consolidated
Net sales	$	367,127		$	143,881		$	511,008
Cost of goods sold		302,270			113,914			416,184
Gross profit		64,857			29,967			94,824
Operating expenses:
Promotion and distribution		12,734			16,425			29,159
Selling, general and administrative		17,590			8,340			25,930
Amortization		1,765			425			2,190
Other operating income, net		(1,439	)		(272	)		(1,711	)
Income from operations		34,207			5,049			39,256
Interest expense, net		24,605			13,072			37,677
Other (income) expense, net		(1,129	)		436			(693	)
Income (loss) before income taxes		10,731			(8,459	)		2,272
Income tax expense		2,098			545			2,643
Net income (loss)	$	8,633		$	(9,004	)	$	(371	)

	First six months 2004
				Non-
	Guarantor			guarantor			Consolidated
Net sales	$	391,940		$	137,278		$	529,218
Cost of goods sold		346,716			108,547			455,263
Gross profit		45,224			28,731			73,955
Operating expenses:
Promotion and distribution		13,355			14,639			27,994
Selling, general and administrative		17,106			8,880			25,986
Amortization		1,956			407			2,363
Other operating (income) expense, net		(415	)		5,576			5,161
Income (loss) from operations		13,222			(771	)		12,451
Interest expense, net		23,956			12,207			36,163
Other (income) expense, net		(1,134	)		396			(738	)
Loss before income taxes		(9,600	)		(13,374	)		(22,974	)
Income tax expense		2,001			569			2,570
Net loss	$	(11,601	)	$	(13,943	)	$	(25,544	)

14

DOANE PET CARE COMPANY AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Unaudited Condensed Consolidated Statements of Cash Flows
For The Guarantor and Non-Guarantor Subsidiaries

	First six months 2005
				Non-
	Guarantor			guarantor			Consolidated
Cash flows from operating activities:
Net income (loss)	$	8,633		$	(9,004	)	$	(371	)
Items not requiring (providing) cash:
Depreciation and amortization		11,395			8,688			20,083
Deferred income tax expense (benefit)		2,098			(56	)		2,042
Asset impairments		1,129			—			1,129
Other non-cash expense (income), net		11,120			(172	)		10,948
Changes in current assets and liabilities		(18,339	)		5,782			(12,557	)
Net cash provided by operating activities		16,036			5,238			21,274
Cash flows from investing activities:
Capital expenditures		(6,044	)		(4,088	)		(10,132	)
Other, net		(781	)		38			(743	)
Net cash used in investing activities		(6,825	)		(4,050	)		(10,875	)
Cash flows from financing activities:
Principal payments on long-term debt		(975	)		(793	)		(1,768	)
Payments for debt issuance costs		(22	)		—			(22	)
Net cash used in financing activities		(997	)		(793	)		(1,790	)
Effect of exchange rate changes on cash and cash equivalents		—			(425	)		(425	)
Increase (decrease) in cash and cash equivalents		8,214			(30	)		8,184
Cash and cash equivalents, beginning of period		24,963			3,884			28,847
Cash and cash equivalents, end of period	$	33,177		$	3,854		$	37,031

15

DOANE PET CARE COMPANY AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Unaudited Condensed Consolidated Statements of Cash Flows
For The Guarantor and Non-Guarantor Subsidiaries

	First six months 2004
				Non-
	Guarantor			guarantor			Consolidated
Cash flows from operating activities:
Net loss	$	(11,601	)	$	(13,943	)	$	(25,544	)
Items not requiring (providing) cash:
Depreciation and amortization		11,640			8,523			20,163
Deferred income tax expense		2,001			64			2,065
Asset impairments		420			—			420
Other non-cash expense (income), net		9,359			(103	)		9,256
Changes in current assets and liabilities		(21,185	)		8,511			(12,674	)
Net cash (used in) provided by operating activities		(9,366	)		3,052			(6,314	)
Cash flows from investing activities:
Capital expenditures		(2,990	)		(2,136	)		(5,126	)
Other, net		(802	)		398			(404	)
Net cash used in investing activities		(3,792	)		(1,738	)		(5,530	)
Cash flows from financing activities:
Proceeds from the issuance of long-term debt		—			13,078			13,078
Principal payments on long-term debt		(3,220	)		(14,056	)		(17,276	)
Payments for debt issuance costs		(3,002	)		—			(3,002	)
Net cash used in financing activities		(6,222	)		(978	)		(7,200	)
Effect of exchange rate changes on cash and cash equivalents		—			(187	)		(187	)
(Decrease) increase in cash and cash equivalents		(19,380	)		149			(19,231	)
Cash and cash equivalents, beginning of period		25,939			3,354			29,293
Cash and cash equivalents, end of period	$	6,559		$	3,503		$	10,062

16

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors
Doane Pet Care Company:

     We have reviewed the accompanying condensed consolidated balance sheet of Doane Pet Care Company and subsidiaries as of July 2, 2005, the related condensed consolidated statements of operations for the three-month and six-month periods ended July 2, 2005 and July 3, 2004, the related condensed consolidated statement of stockholder’s (deficit) equity and comprehensive loss as of and for the six-month period ended July 2, 2005 and the related condensed consolidated statements of cash flows for the six-month periods ended July 2, 2005 and July 3, 2004. These condensed consolidated financial statements are the responsibility of the Company’s management.

     We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

  ��  Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

     We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Doane Pet Care Company and subsidiaries as of January 1, 2005, and the related consolidated statements of operations, stockholder’s equity and comprehensive income (loss) and cash flows for the year then ended (not presented herein); and in our report dated March 30, 2005, we expressed an unqualified opinion on those consolidated financial statements. Our report refers to the restatement of previously issued fiscal 2003 consolidated financial statements and a change in accounting for senior preferred stock. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of January 1, 2005 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ KPMG LLP

Nashville, Tennessee
August 20, 2005

17

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The reader is encouraged to refer to the accompanying unaudited condensed consolidated financial statements and related notes included elsewhere in this quarterly report on Form 10-Q and our audited consolidated financial statements and related notes in our 2004 10-K.

Forward-Looking Statements

     Certain of the statements in this quarterly report on Form 10-Q are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Some of these statements can be identified by terms and phrases such as “anticipate,” “believe,” “assume,” “intend,” “estimate,” “expect,” “continue,” “could,” “may,” “plan,” “project,” “predict,” “will” and similar expressions. These statements appear in a number of places and include statements regarding our plans, beliefs or current expectations, including those plans, beliefs and expectations of our officers and directors, with respect to, among other things:

• reliance on a few customers for a large portion of our sales and our ability to maintain our relationships with these customers;

• our exposure to, and our ability to manage, market risk relating to commodity, oil and natural gas prices, interest rates and foreign currency exchange rates;

• future capital expenditures and our ability to finance these capital expenditures;

• our ability to finance our debt service requirements under our senior credit facility and other indebtedness and to comply with the financial covenants under our debt agreements;

• our future results of operations or financial condition;

• our business strategies and other plans and objectives for future operations;

• general economic and business conditions;

• business opportunities that may be presented to and pursued by us from time to time;

• risks related to our international operations;

• the impact of existing or new accounting pronouncements; and

• the outcome of any legal proceedings to which we or any of our subsidiaries may be a party.

     These forward-looking statements are based on our assumptions and analyses and are not guarantees of our future performance. These statements are subject to risks, many of which are beyond our control, that could cause our actual results to differ materially from those contained in our forward-looking statements. Factors that could cause results to differ materially include without limitation: decreases or changes in demand for our products, changes in market trends, general competitive pressures from existing and new competitors, price volatility of commodities, oil, natural gas, other raw materials and packaging, foreign currency exchange rate fluctuations, future investment returns on our pension plans, changes in laws and regulations, adverse changes in operating performance, adverse economic conditions and other factors described under “Risk Factors” in our 2004 10-K.

18

     We undertake no obligation to revise these forward-looking statements to reflect any future events or circumstances. All forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary statement.

Second Quarter Fiscal 2005 in Review

     In the second quarter of fiscal 2005, net sales decreased 5.6% to $243.9 million from $258.3 million in the second quarter of fiscal 2004. The decrease in our net sales was primarily due to our cost-sharing arrangements and the related impact of passing through a portion of our lower commodity costs and, to a lesser extent, lower domestic sales volume, partially offset by favorable foreign currency exchange rate fluctuations. Our gross profit increased $9.6 million from the second quarter of fiscal 2004 primarily as a result of lower global commodity costs, partially offset by the above factors affecting net sales.

     In an effort to reduce manufacturing costs and increase operating efficiencies, we closed our Cartersville, Georgia manufacturing facility at the end of the second quarter of fiscal 2005. In connection with the plant closure, we recorded non-cash asset impairments of $1.1 million in other operating expense (income), net. In addition, we expect to incur total cash charges of approximately $0.2 million related to severance and carrying costs.

Results of Operations

     We manufacture pet food, primarily private label, in the United States and Europe using 27 combined manufacturing and distribution facilities. We manufacture pet food products primarily for dogs and cats, including dry, wet, semi-moist, soft dry, soft treats and dog biscuits. We sell our products to various types of retailers.

     Historically, approximately 75% of our cost of goods sold has been comprised of raw material and packaging costs with the remainder primarily comprised of salaries, wages and related fringe benefits, utilities and depreciation. Our operating expenses generally consist of promotion and distribution expenses, selling, general and administrative expenses, amortization and other operating (income) expense. Promotion and distribution expenses are primarily comprised of promotions, freight, brokerage fees and warehousing expenses. Selling, general and administrative expenses primarily include salaries and related fringe benefits, depreciation and other corporate overhead costs, which typically do not increase proportionately with increases in net sales and sales volumes.

     We have foreign currency exposure relating to our business transactions in currencies other than the U.S. dollar. In addition, the timing and extent of foreign currency exchange rate fluctuations may have a material impact on our operations due to the translations of the financial statements of our foreign subsidiaries into U.S. dollars. Although our functional currencies other than the U.S. dollar include the Euro, Danish Krona and British Pound Sterling, the Euro to U.S. dollar exchange rate approximates the impact of movements in our individual functional foreign currency exchange rates. For the purpose of analyzing our results of operations, the average Euro to U.S. dollar exchange rates for the three months ending in the second quarter of fiscal 2005 and 2004 were approximately 1.26 and 1.20, respectively, and for the six months ending in the second quarter of fiscal 2005 and 2004 were approximately 1.28 and 1.23, respectively. For the purpose of analyzing our financial position, the Euro to U.S. dollar exchange rates as of the end of the second quarter of fiscal 2005 and the end of fiscal 2004 were approximately 1.21 and 1.36, respectively.

     Our fiscal year ends on the Saturday nearest to the end of December; therefore, fiscal 2004 ended on January 1, 2005. Each quarter ends on the Saturday nearest to the end of the calendar month with the second quarters of fiscal 2005 and 2004 ending on July 2, 2005 and July 3, 2004, respectively.

19

     Statement of operations data.The following table sets forth our statement of operations derived from the accompanying unaudited condensed consolidated financial statements expressed as a percentage of net sales for the second quarter and first six months of fiscal 2005 and 2004 as indicated (in thousands, except percentages):

	Second quarter										First six months
	2005					2004					2005					2004
Net sales	$	243,872		100.0	%	$	258,338		100.0	%	$	511,008		100.0	%	$	529,218		100.0	%
Cost of goods sold:
Commodity costs		116,495		47.8			134,152		51.9			240,307		47.0			270,476		51.1
Other		84,656		34.7			91,049		35.3			175,877		34.4			184,787		34.9
Total cost of goods sold		201,151		82.5			225,201		87.2			416,184		81.4			455,263		86.0
Gross profit		42,721		17.5			33,137		12.8			94,824		18.6			73,955		14.0
Operating expenses:
Promotion and distribution		14,729		6.0			13,767		5.3			29,159		5.7			27,994		5.3
Selling, general and administrative		12,811		5.3			12,803		5.0			25,930		5.1			25,986		4.9
Amortization		1,024		0.4			1,134		0.4			2,190		0.4			2,363		0.4
Other operating expense (income), net		1,805		0.7			3,938		1.5			(1,711	)	(0.3	)		5,161		1.0
Income from operations		12,352		5.1			1,495		0.6			39,256		7.7			12,451		2.4
Interest expense, net		19,031		7.8			18,186		7.0			37,677		7.4			36,163		6.8
Other income, net		(448	)	(0.2	)		(331	)	—			(693	)	(0.1	)		(738	)	(0.1	)
(Loss) income before income taxes		(6,231	)	(2.5	)		(16,360	)	(6.4	)		2,272		0.4			(22,974	)	(4.3	)
Income tax expense		1,316		0.6			1,377		0.5			2,643		0.5			2,570		0.5
Net loss	$	(7,547	)	(3.1	)%	$	(17,737	)	(6.9	)%	$	(371	)	(0.1	)%	$	(25,544	)	(4.8	)%

Second Quarter of Fiscal 2005 Compared to Second Quarter of Fiscal 2004

     Net sales. Net sales in the second quarter of fiscal 2005 decreased 5.6%, or $14.4 million, to $243.9 million from $258.3 million in the second quarter of fiscal 2004. The decrease in our net sales was primarily due to our cost-sharing arrangements and the related impact of passing through a portion of our lower U.S. commodity costs and, to a lesser extent, lower domestic sales volume, partially offset by favorable foreign currency exchange rate fluctuations.

     Gross profit.Gross profit in the second quarter of fiscal 2005 increased 28.9%, or $9.6 million, to $42.7 million from $33.1 million in the second quarter of fiscal 2004. This increase was primarily due to lower global commodity costs, which decreased as a percentage of net sales to 47.8% in the second quarter of fiscal 2005 from 51.9% in the second quarter of fiscal 2004, partially offset by the above factors affecting net sales. In addition, other cost of goods sold included a $3.2 million favorable period-over-period change related to the volatility of commodity prices combined with the fair value accounting for our commodity derivative instruments under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, or SFAS 133. Other cost of goods sold in the second quarter of fiscal 2005 also included increased manufacturing efficiencies primarily related to our European restructuring, partially offset by increased packaging costs due to higher oil and steel prices.

     Promotion and distribution. Promotion and distribution expenses for the second quarter of fiscal 2005 increased 7.0%, or $0.9 million, to $14.7 million from $13.8 million in the second quarter of fiscal 2004. This increase was primarily due to higher global freight costs resulting from both rising gas prices and resumed shipments to Mexico.

20

     Other operating expense (income), net.Other operating expense of $1.8 million in the second quarter of fiscal 2005 consisted primarily of $1.1 million of asset impairments and $0.6 million in transaction costs. Other operating expense of $3.9 million in the second quarter of fiscal 2004 related to our European restructuring plan and consisted of installation costs of $2.0 million, severance costs of $1.3 million and manufacturing inefficiencies of $0.6 million.

     Interest expense, net. Interest expense, net of interest income, in the second quarter of fiscal 2005 increased 4.6%, or $0.8 million, to $19.0 million from $18.2 million in the second quarter of fiscal 2004 primarily due to the increase of our senior preferred stock dividends.

     Income tax expense. We recognized income tax expense of $1.3 million in the second quarter of fiscal 2005 compared to $1.4 million for the second quarter of fiscal 2004. The overall effective tax rate for both periods differs from the expected combined federal and state rate of 38.9% due to the valuation allowances against our deferred tax assets that are not recoverable through known reversals of deferred tax liabilities.

First Six Months of Fiscal 2005 Compared to First Six Months of Fiscal 2004

     Net sales.Net sales for the first six months of fiscal 2005 decreased 3.4%, or $18.2 million, to $511.0 million from $529.2 million for the first six months of fiscal 2004. The decrease in our net sales was primarily due to our cost-sharing arrangements and the related impact of passing through a portion of our lower U.S. commodity costs and, to a lesser extent, lower domestic sales volume, partially offset by favorable foreign currency exchange rate fluctuations.

     Gross profit.Gross profit for the first six months of fiscal 2005 increased 28.2%, or $20.8 million, to $94.8 million from $74.0 million for the first six months of fiscal 2004. This increase was primarily due to lower global commodity costs, which decreased as a percentage of net sales to 47.0% in the first six months of fiscal 2005 from 51.1% in the first six months of fiscal 2004, partially offset by the above factors affecting net sales. In addition, other cost of goods sold included a $7.4 million favorable period-over-period change related to the volatility of commodity prices combined with the fair value accounting for our commodity derivative instruments under SFAS 133. Other cost of goods sold in the first six months of fiscal 2005 also included increased manufacturing efficiencies primarily related to our European restructuring, partially offset by increased packaging costs due to higher oil and steel prices.

     Promotion and distribution. Promotion and distribution expenses for the first six months of fiscal 2005 increased 4.2%, or $1.2 million, to $29.2 million from $28.0 million for the first six months of fiscal 2004. This increase was primarily due to higher global freight costs resulting from both rising gas prices and resumed shipments to Mexico.

     Other operating expense (income), net. Other operating income, net, of $1.7 million in the first six months of fiscal 2005 included $3.2 million of favorable litigation settlements, partially offset by $1.1 million of asset impairments and $0.6 million in transaction costs. Other operating expense, net, of $5.2 million in the first six months of fiscal 2004 consisted of: European restructuring costs of $5.6 million including severance costs of $3.0 million, installation costs of $2.0 million and manufacturing inefficiencies of $0.6 million; asset impairments of $0.4 million related to the closure of our distribution center in Alexandria, Louisiana; and $0.8 million of income related to an arbitration award.

     Interest expense, net.Interest expense, net of interest income, for the first six months of fiscal 2005 increased 4.2%, or $1.5 million, to $37.7 million from $36.2 million for the first six months of fiscal 2004 primarily due to the increase of our senior preferred stock dividends.

     Income tax expense.We recognized income tax expense of $2.6 million for the first six months of both fiscal 2005 and fiscal 2004. The overall effective tax rate for both periods differs from the expected

21

combined federal and state rate of 38.9% due to the valuation allowances against our deferred tax assets that are not recoverable through known reversals of deferred tax liabilities.

Liquidity and Capital Resources

     We have historically funded our operations, capital expenditures and working capital requirements with cash flows from operations, bank borrowings and the issuance of other indebtedness.

Cash and Cash Flows

     Net cash provided by our operating activities was $21.3 million for the first six months of fiscal 2005 compared to net cash used in operating activities of $6.3 million for the first six months of fiscal 2004. The improvement was primarily due to higher earnings.

     Net cash used in our investing activities was $10.9 million for the first six months of fiscal 2005 compared to $5.5 million for the first six months of fiscal 2004. The change resulted from increased capital expenditures, which were $10.1 million for the first six months of fiscal 2005 compared to $5.1 million for the first six months of fiscal 2004.

     Net cash used in our financing activities was $1.8 million for the first six months of fiscal 2005 compared to $7.2 million for the first six months of fiscal 2004. In the first six months of fiscal 2005, we made scheduled payments on our current senior credit facility and debt of our foreign subsidiaries. In the first six months of fiscal 2004, we made scheduled principal payments on our previous senior credit facility, paid transaction fees and expenses associated with a first quarter amendment to our previous senior credit facility and refinanced certain of our European loans.

Debt

     We are highly leveraged and have significant cash requirements for debt service relating to our senior credit facility, senior notes, senior subordinated notes, industrial development revenue bonds and foreign debt. Our ability to borrow is limited by our senior credit facility, including compliance with the financial covenants therein, and the limitations on the incurrence of additional indebtedness in the indentures governing our senior notes and senior subordinated notes.

     Our senior credit facility provides for total commitments of $230.0 million, consisting of a $195.0 million term loan facility, of which $1.5 million has been repaid as of the end of the second quarter of fiscal 2005, and a $35.0 million revolving credit facility, with a $20.0 million sub-limit for issuance of stand-by letters of credit. The term loan facility bears interest, at the option of the Company, of adjusted LIBOR plus 4.00%, or ABR, as defined in the senior credit facility agreement, plus 3.00%. The revolving credit facility bears interest, at the option of the Company, of adjusted LIBOR plus 4.50%, or ABR plus 3.50%. As of the end of the second quarter of fiscal 2005, the term loan facility bore interest at 7.41%. We are required to make annual principal payments on the senior credit facility calculated as 1% of $195.0 million, payable in equal quarterly installments of each year. The loans under our senior credit facility may be prepaid and commitments may be reduced; however, payments on the term loan facility may not be reborrowed.

Liquidity

     As of the end of the second quarter of fiscal 2005, our principal sources of liquidity consisted of working capital of $70.9 million, including cash of $37.0 million, and $30.2 million of availability under our revolving credit facility.

     We believe that cash flows generated from our business, together with available cash balances and future borrowings, will be sufficient in the near term to enable us to make interest and required principal payments on our debt and to provide us with the necessary liquidity for operational and capital requirements in our current operating environment. However, as shown below in the annual maturities of

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long-term debt summary, we have significant debt and redemption obligations that mature in 2007. We may be required to refinance all or a portion of the principal amount of our outstanding obligations, including those that mature in 2007, on or prior to maturity or a mandatory redemption date. In addition, we may not have sufficient capital available to us for any future acquisitions, joint ventures or similar transactions. We believe that offerings of additional debt securities are possible, or other sources of capital are available, if the need arises, although any such capital may not be available on terms acceptable to us or at all.

     Although we believe that future borrowings under our revolving credit facility will be available to fund our liquidity needs, availability of these funds is subject to our satisfaction of certain customary terms and conditions, including our ability to satisfy the financial covenants in our senior credit facility. Refer to our 2004 10-K for a summary of these financial covenants. We were in compliance with the financial covenants in our senior credit facility as of the end of the second quarter of fiscal 2005; however, we have experienced difficulty in the past satisfying financial covenants in our previous senior credit facility, and negotiated amendments and obtained waivers for fiscal 2000, 2001 and 2003 due to covenant non-compliance. Our ability to satisfy the covenants contained in our senior credit facility is determined based on our cash flows, outstanding senior secured debt and capital expenditures. We may experience difficulty satisfying these covenants in the future. If we are unable to negotiate an amendment or secure a waiver from our lenders for any potential default, it could result in an event of default under the senior credit facility and permit a majority of the lenders to accelerate outstanding debt under the senior credit facility, terminate our revolving credit commitment and seize the cash in our operating accounts. Such acceleration would result in cross-defaults under our senior notes and senior subordinated notes. In that event, we may not have sufficient liquidity to make interest and required principal payments on our debt and to fund operational and capital requirements.

     We believe the capital expenditures permitted under our senior credit facility are sufficient to provide us with the necessary flexibility to spend required maintenance capital and at the same time fund any planned expansion, cost reduction projects and customer requirements for fiscal 2005. We anticipate that our capital expenditures for fiscal 2005 will approximate $25 million to $30 million, with approximately $10 million to $12 million required to maintain our current business. Our capital expenditures were $10.1 million in the first six months of fiscal 2005.

Annual Maturities of Long-Term Debt

     A summary of the maturities by fiscal year of our long-term debt as of the end of the second quarter of fiscal 2005 follows (in thousands):

Fiscal	Maturities
2005	$	1,731
2006		3,522
2007		456,818
2008		2,141
2009		2,282
2010 and thereafter		229,156
	$	695,650

Commitments and Contingencies

     We believe our operations are in compliance in all material respects with environmental, safety and other regulatory requirements; however, these requirements may change in the future, which may cause us to incur material costs to comply with these requirements or in connection with the effect of these matters on our business.

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Inflation and Changes in Prices

     Our financial results depend to a large extent on the costs of raw materials and packaging and our ability to pass through increased costs to our customers. Historically, market prices for commodity grains and food stocks have fluctuated in response to a number of factors, including changes in U.S. government farm support programs, changes in international agricultural trading policies, impacts of disease outbreaks on protein sources and the potential effect on supply and demand, changes in international demand, trading activity in commodity markets, as well as weather conditions during the growing and harvesting seasons. Our costs for packaging materials are affected by fluctuations in paper, steel and oil prices resulting from changes in supply and demand, general economic conditions and other factors. In addition, our manufacturing costs are impacted by changes in natural gas prices and our freight costs are affected by changes in gas prices. Our results of operations have been exposed to volatility in the commodity and natural gas markets in the past. We have cost-sharing arrangements with certain of our domestic customers to reduce the impact of volatile commodity costs; however, these arrangements only reduce our exposure to such volatility in the future and are subject to change.

     In the event of any increases in raw materials, packaging, natural gas and freight costs, we may be required to seek increased selling prices for our products to avoid margin deterioration. We cannot provide any assurances as to the timing or extent of our ability to implement future selling price increases in the event of increased raw materials, packaging, natural gas or freight costs or whether any selling price increases implemented by us may affect future sales volumes to our customers.

Seasonality

     Our sales are moderately seasonal. We normally experience an increase in net sales during the first and fourth quarters of each year, which is typical in the pet food industry. Generally, cooler weather results in increased dog food consumption.

Recently Issued Accounting Pronouncements

     See Note 2, Recent Accounting Pronouncements, in the accompanying unaudited condensed consolidated financial statements.

Critical Accounting Policies

     Accounts receivable allowances.As of the end of the second quarter of fiscal 2005 and the end of fiscal 2004, our gross accounts receivable were $94.4 million and $116.3 million, respectively. We had allowances of $2.9 million and $3.9 million as of the end of the second quarter of fiscal 2005 and the end of fiscal 2004, respectively, consisting of reserves for doubtful accounts, outstanding deductions with customers and cash discounts. We estimate the allowances by applying a recovery percentage based on historical collection experience. We accrue additional allowances based on a specific identification review for amounts deemed to be at risk. Receivables are written off against the allowances at the point in which an amount is deemed uncollectible by us. We may revise our allowances against accounts receivable as we receive more information or as we assess other factors impacting the realizability of our accounts receivable.

     Inventories allowances.As of the end of the second quarter of fiscal 2005 and the end of fiscal 2004, our gross inventories were $69.9 million and $71.2 million, respectively. We had allowances, primarily for obsolescence of packaging inventories, of $2.3 million and $2.9 million as of the end of the second quarter of fiscal 2005 and the end of fiscal 2004, respectively. We estimate our allowances against inventories based on a specific identification review of obsolete stock keeping units, or SKUs, or probable SKUs to be rationalized. We may revise our allowance against inventories as we receive more information on this matter or as we assess other factors impacting the realizability of our inventories.

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     Deferred tax assets.As of the end of the second quarter of fiscal 2005 and the end of fiscal 2004, our federal net operating loss, or NOL, carryforwards were $163.2 million and $142.2 million, respectively, and our foreign NOL carryforwards were $0.5 million and $0.9 million, respectively. Our gross deferred tax assets, including federal, foreign, state and local NOL carryforwards, were $87.7 million and $79.0 million as of the end of the second quarter of fiscal 2005 and the end of fiscal 2004, respectively, and our gross deferred tax liabilities were $56.5 million and $54.8 million, respectively.

     We have concluded that it is more likely than not that we will not generate sufficient future taxable income to realize our deferred tax assets and that a valuation allowance is necessary. Our consolidated valuation allowance was $64.1 million and $55.4 million as of the end of the second quarter of fiscal 2005 and the end of fiscal 2004, respectively. During the first six months of fiscal 2005, we increased the valuation allowance against our U.S. federal and state deferred tax assets and foreign deferred tax assets by $6.9 million and $1.8 million, respectively. We currently expect that future years’ deferred income tax expense (benefit) will include deferred tax expense approximating the growth in our deferred tax liabilities related to the amortization of goodwill for tax purposes.

     Goodwill and other intangible assets.As of the end of the second quarter of fiscal 2005 and the end of fiscal 2004, our goodwill and other intangible assets were $376.4 million and $390.5 million, respectively. The $14.1 million decrease is due to the impact of foreign currency exchange rate fluctuations. We test the carrying value of our goodwill and other intangible assets for impairment annually in the fourth quarter of each fiscal year and upon the occurrence of certain events. Our impairment test includes quantitative analyses of discounted future cash flows, market multiples of earnings and comparable transactions, if available. If the estimated fair value of goodwill and other intangible assets of either our domestic or European reporting unit is less than the carrying value, an impairment loss will be recognized. In the fourth quarter of fiscal 2004, we performed our annual assessment of impairment and determined no impairment was evident at that date.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

     We are exposed to market risks, which may give rise to losses from adverse changes in market prices and rates. Our market risks could arise from changes in commodity prices, interest rates and foreign currency exchange rates.

     Commodity price risk.We are exposed to market risk related to changes in commodity prices. We may seek to manage our commodity price risk associated with market fluctuations by using derivative instruments for portions of our corn, soybean meal, alternative proteins and natural gas purchases, principally through exchange traded futures and options contracts. The terms of such contracts are generally less than one year. During the term of a contract, we balance positions daily with cash payments to or from the exchanges. At the termination of a contract, we have the ability to settle financially or by exchange for the physical commodity, in which case, we would deliver the contract against the acquisition of the physical commodity. Our policy does not permit speculative commodity trading.

     Although we may seek to manage the price risk of market fluctuations by hedging portions of our primary commodity product purchases, our results of operations have been adversely affected in the past by these fluctuations and may in the future. Moreover, the use of hedging instruments also reduces our ability to take advantage of short-term reductions in raw material prices. If one or more of our competitors is able to reduce their manufacturing costs by taking advantage of any reductions in raw material prices, we may face pricing pressures from these competitors and may be forced to reduce our selling prices or face a decline in net sales, either of which could have a material adverse effect on our business, results of operations and financial condition.

     Our commodity derivative instruments are measured at fair value under SFAS 133 in our accompanying unaudited condensed consolidated financial statements. Our results of operations for particular periods have been adversely affected in the past under SFAS 133 fair value accounting of our commodity derivative instruments due to the volatility in commodity prices and, similarly, our results of operations may be adversely affected in the future by SFAS 133 accounting.

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     As of the end of the second quarter of fiscal 2005, we had open commodity contracts with a fair value gain of $3.6 million. Based upon an analysis we completed at the end of the second quarter of fiscal 2005 in which we utilized our actual derivative contractual volumes and assumed a 5% adverse movement in commodity prices, we determined the potential decrease in the fair value of our commodity derivative instruments would be approximately $1.0 million.

     Interest rate risk.We are exposed to market risk related to changes in interest rates. We have in the past and may in the future enter into interest rate swap and cap contracts to limit our exposure to the interest rate risk associated with our floating rate debt, which totaled $193.5 million at the end of the second quarter of fiscal 2005. Changes in market values of these financial instruments are highly correlated with changes in market values of the hedged item both at inception and over the life of the contract. At the end of the second quarter of fiscal 2005, we had no outstanding interest rate swap or cap contracts.

     Our results of operations may be adversely affected by changes in interest rates. Assuming a 100 basis point increase in the interest rates on our floating rate debt as of the end of the second quarter of fiscal 2005, interest expense would have increased by approximately $0.5 million and $1.0 million for the second quarter and first six months of fiscal 2005. In addition, such a change would have resulted in a decrease of approximately $12.3 million in the fair value of our fixed rate debt at the end of the second quarter of fiscal 2005. In the event of an adverse change in interest rates, we could take action to mitigate our exposure; however, due to the uncertainty of these potential actions and the possible adverse effects, our analysis assumes no such actions. Furthermore, our analysis does not consider the effect of any changes in the level of overall economic activity that may exist in such an environment.

     Foreign currency exchange risk. We have foreign currency exposure relating to the translation of the financial statements of our foreign operations into U.S. dollars. Our functional currencies, other than the U.S. dollar, include the Euro, Danish Krona and British Pound Sterling. The cumulative translation adjustment for the net investment in our European operations is recognized in accumulated other comprehensive income in the accompanying unaudited condensed consolidated financial statements included herein. At the end of the second quarter of fiscal 2005, we had a cumulative translation gain of $37.7 million, which included a $19.2 million cumulative loss for the translation of our previously extinguished Euro-denominated debt to U.S. dollars through the final repayment date.

     We also have foreign currency exposure, to a lesser extent, relating to transacting business in countries with foreign currencies other than our functional currencies. From time to time, we may enter into foreign currency options or forward contracts for the purchase or sale of a foreign currency to mitigate the risk from foreign currency exchange rate fluctuations in those transactions and translations. As of the end of the second quarter of fiscal 2005, we had open foreign currency contracts with a fair value gain of $0.8 million.

ITEM 4. Controls and Procedures

     Evaluation of disclosure controls and procedures.Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that we file or furnish under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

     Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we performed an evaluation of the design and operation of our disclosure controls and procedures as of the end of the quarterly period ending July 2, 2005, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

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     Changes in internal control over financial reporting.There were no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during our last fiscal quarter that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

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PART II. Other Information

ITEM 1. Legal Proceedings

     See Note 11, Commitments and Contingencies, in the accompanying unaudited condensed consolidated financial statements included in Part I, Item 1 of this quarterly report on Form 10-Q, which is incorporated by reference in this Part II, Item 1.

ITEM 6. Exhibits

Exhibit
Number	Description
15.1*	Letter from KPMG LLP dated August 20, 2005 regarding unaudited interim financial information.
31.1*	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) / 15(d)-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) / 15(d)-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
32.1†	Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2†	Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Filed herewith.
†	Furnished herewith.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DOANE PET CARE COMPANY
By:	/s/ PHILIP K. WOODLIEF
	Philip K. Woodlief
	Vice President, Finance and Chief Financial Officer

By:	/s/ STEPHEN P. HAVALA
	Stephen P. Havala
	Corporate Controller and Principal Accounting Officer

Date: August 22, 2005

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EXHIBIT INDEX

Exhibit
Number	Description
15.1*	Letter from KPMG LLP dated August 20, 2005, regarding unaudited interim financial information.
31.1*	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) / 15(d)-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
31.2*	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) / 15(d)-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
32.1†	Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2†	Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Filed herewith.
†	Furnished herewith.